Friday, 5 June 2015

The academic consensus on the impact of austerity

“And before I am savaged
(as I always am) by the Krugman crew of Keynesian economists for even allowing
George Osborne's argument an airing, I am not saying that the net negative
impact on our national income and living standards of cutting the deficit faster
is less than their alternative route of slower so-called fiscal consolidation.

I am simply pointing out
that there is a debate here (though Krugman, Wren-Lewis and Portes are utterly
persuaded they've won this match - and take the somewhat patronising view that
voters who think differently are ignorant sheep led astray by a malign or
blinkered media).”

I do not want to disappoint, and as I was about to write
something on the macroeconomic consensus on austerity anyway, let me oblige -
not in savaging (I leave that to my American colleague in arms!), but in
justifying why I think there is such a consensus in the places that count. By
consensus I do not mean that everyone agrees - of course not - but that a very
large majority do, which probably counts as consensus in economics.

Unfortunately we do not have a great deal of information on
what academic economists as a whole think about austerity, but we do have two
important survey results which are pretty conclusive. In the US, there is the
IFM Forum, which regularly asks a group of distinguished economists - including
many macroeconomists - their views on key policy issues. The last poll I have
seen suggests that 82% of that panel thought the
2009 Obama stimulus had reduced unemployment, while only 2% disagreed. In the
UK, the CFM survey asked a similar question to a smaller group of
academic economists, most of whom are macroeconomists. Only 15% agreed that the
austerity policies of the coalition government have had a positive effect on
aggregate economic activity, while 66% disagreed. That consensus is not
universal - it would not apply in Germany for example - but I doubt if anyone
would disagree when I say that US economists call the shots as far as academic
macroeconomics is concerned.

This is why economists the world over continue to
teach Keynesian macro to undergraduates, and normally not as one ‘school of
thought’ but rather as an initial approximation of how the economy actually
works. As Amartya Sen so forcefully reminds us, the experience of the last hundred
years has earned Keynesian theory this central role.

However we have another, more indirect, source of evidence. If
you asked whether there was a standard model for analysing the business cycle
among economists in academia and in
policy making institutions, the answer would have to be the New Keynesian
model. I want to include economists in central banks in particular because they
have to put theories of the business cycle into practice on a regular basis.
The key macromodels that central banks use to forecast and to analyse policy
are Keynesian, and many are New Keynesian. Having worked a great deal with New
Keynesian models myself, I also know what they imply about temporary changes in
government spending in a liquidity trap (see this paper by Mike Woodford, for example). It may
be possible to adapt these models to give you expansionary austerity, but no
such adaptations command general or even partial support.

The models used by pretty well all central banks would
therefore imply that temporary cuts in government spending were contractionary,
absent any monetary policy offset. The governors of the central banks of the UK and US say this publicly. European central bank
governors do not tend to say this, and instead continue to advocate austerity
despite deflation. The reason why they might do this despite what their models
tell them will be the subject of a later post, but I suspect it has little to
do with conventional macroeconomics (but see also the point about German
academic views above, and Sen’s article). If temporary cuts in government
spending are contractionary in a liquidity trap, it follows that it is much
better to delay this form of austerity.

I could add repeated arguments from economists at the IMF (e.g.
here and most recently here), and now also the OECD (FT here, or ungated here). Of course there are some academic
economists who continue to argue that the impact of austerity is expansionary
or at least minor - I suspect there always will be, as long as this remains an
intense political debate. They would be joined by many City economists, but
they are neither unbiased nor the source of any particular expertise on this
issue.

This is why, among economists with expertise, there is a clear
majority view that fiscal austerity is significantly contractionary in a
liquidity trap. That does not automatically mean that the 2010 policy switch
was wrong, or that it had a big impact on the UK in 2010-2012: there are
additional issues here which I have discussed many times. How damaging to the
macroeconomy any additional austerity from Osborne will be also depends on
whether we are or will be in a liquidity trap. But the fact that we might well be means that additional
austerity now is a big mistake, and on this I believe the great majority of
academic macroeconomists and those macroeconomists working in policy making
institutions would agree.

As far as the media is concerned, I cannot believe that Robert
Peston would disagree that a large section are ‘malign’, given how political
this issue is. When I have talked to journalists who have some freedom to
report the facts rather than what their editors want them to report, the
argument I most often hear is that because this issue is political, they have
to report it as a ‘debate’ come what may. I have never had the pleasure of
talking to Robert Peston (he is welcome to email at any time), and I would be very
interested in how he would respond to the evidence I have laid out. As for the
public, the word sheep is his not mine. Would he really argue that the public
are independently well informed on these matters, or unaffected by the media’s
presentation of this and similar issues? Which is why I will continue to - as
he might say - bang on about this, even though my audience is tiny in
comparison to most journalists.

43 comments:

I heard a great example of the media twisting the debate and muddying understanding yesterday:

Tory minister talking about sale of Royal Mail being used to pay down debt. Fine. But the journalist talked about Royal Mail sale proceeds being used to reduce the deficit! I heard the journalist first and thought the Tories were being deliberately misleading in their terminology and playing to the narrative they had constructed - but no, the Tories were being perfectly accurate and the journalist (whether wittingly or not) had shoe-horned it into the "cutting the deficit" canard.

If you look at the official government press release, it contains the following lines attributed to Osborne: "Further savings in departments this year – and selling our stake in the Royal Mail. Getting on with what we promised. Reducing the deficit – that is how you deliver lasting economic security for working people."

There was a clear attempt by the government to present the one-off sale of Royal Mail shares as a "deficit reduction" measure.

As I said recently, I have been going through my BBC fie for the last Parliament, and here 26 September 2013, Stephanie Flanders to leave the BBC for JP Morgan may be informative, in which she wrote that:

"In many ways, I will be doing the same thing in my new job at JP Morgan Asset Management that I have been doing as [BBC] Economics Editor: explaining what is happening in the economy and markets, and why it matters. What will be different, in my new role, is that I will have more time and resources to develop my own ideas - and get a deeper understanding of the markets, inside one of the most experienced financial institutions in the world. I will even (shock) be permitted to have an opinion - my own view. At least, if I can remember how, after 11 years of trying to avoid them."

Excellent post. When I read Peston's blog yesterday, I thought exactly along the same lines with the CFM survey coming to my mind immediately.

I also wondered whether Peston's "school of thought" presentation reflects his (intellectual) laziness, especially relative to the balanced yet usually rigorous posts by Stephanie Flanders in the past, rather than a failure by academic economists to communicate more effectively. He tends to treat what are essentially scientific questions with the same attitude as a beginner reporter would treat the question of the correct toilet paper orientation.

On the other hand, the "school of thought" understanding of the economics of austerity might also be driven by the increasingly frequent and obvious (to everyone) departure of people like Krugman from economics to political arguments.

On that last point, you are right that some argue that economists must refrain from talking about politics to retain credibility. I disagree - what economists should do is be much more open about the interrelationships between the two, while at the same time following the evidence on the economics. Paul does this: see for example his comments on whether inequality helped cause the financial crisis.

Isn't it interesting how the same evidence can be interpreted in different ways? You see Flanders as 'rigorous' and intellectually able while she admits (as Anonymous at 02:22 above shows) to being a mouthpiece for her editors.

Maybe we should ask Flanders but I think she talks about limited opportunities to write commentaries as a genre, and the need to present many opinions instead of picking one that you would consider most relevant/closest to your heart/best argued etc. or formulating a new stance on an issue (probably informed by reading existing stuff). I think that's different from saying she was a mouthpiece.

In the present context, a rigorous [BBC] reporter would have said something like "a dominant majority of prominent academic economists" instead of the "school of thought", whilst also saying that some people - largely outside academia - believe in expansionary austerity. An anti-austerity mouthpiece would have said "all relevant economists". A pro-austerity mouthpiece would have said "some economists on the Keynesian/saltwater fringe of the academia". The Daily Mail would have said "some economists, many of whom are immigrants" :)

Anonymous. Spot on. This is the crux of the problem. The BBC is by far the best news source we have in the mainstream media and they are guilty of following print media stories and what I like to call 'default bias'

In an attempt to be 'fair' they present two sides as equal when they're really not.

Two observationsThe only 'economists' I can find who support Osborne's position are city economists who are not the same and true academics and have a clear vested interest. (I'm am for the purpose of this ignoring the Hayek economists who argue that austerity is damaging but necessary as Osborne keeps saying austerity is what makes growth). If you read Krugman or Wren-Lewis or Stiglitz or Mark Blyth they don't assert their position, they lay out the evidence for you.

What the BBC serve up is "The government says x. The city agrees. Some critics disagree." Whilst this is factual it's certainly not informative and I would argue it's not really true either.

I would refer Robert Peston to this recent Krugman post, and the survey at the bottom on Obamacare. It demonstrates that it is quite possible for voters to believe something that can be empirically demonstrated as false.

It is entirely possible for a "malign or blinkered media" to lead voters astray, not because voters are ignorant but because no one person has the time to verify and understand everything they are told and rely on the media to digest and present what's going on in the world. Journalists have a duty to present the truth to their audience, if they do not do this then they have failed the people they are supposed to serve.

That's all very nice. But what we see in reality is a very large number of people happily coexisting in the (written by idiots, read by idiots) quadrant of a media matrix. Somehow Daily Heil readers, for example, enjoy the soup they are being served even if everybody knows that kitchen staff regularly pee into the soups. In fact, having an over-sized bladder is a key job entry requirement at Daily Heil. You clearly underestimate the importance of people's priors. Some people may not want to be served the truth, they don't like the truth, they want to hate someone, they want to be shocked, they want to be lied to. And the market delivers that to them very efficiently. What do you do then? Ban idiotism?

Very true, Hitler and Stalin were experts at it. Plato and Aristotle stated that the 'noble lie' can be sanctioned if it is for the greater good. Presumably, that is why marketing agencies exist, multi-millionaires purchase newspapers and why Mr Murdoch told his journalists to do a better job of persuading the electorate to elect of a Conservative government, or risk loosing their jobs and why most advertisements spend more time presenting their products as life style accessories than stating what their product can do and how much it will cost. Sophistry is very much a live and kicking, and Mr. Peston, as a journalist at the BBC, has a size twelve metal toe-cap boots on. ShaunT

I hadn't, because I thought the number of people who would read that would also be tiny. (I perhaps shouldn't exaggerate the 'tiny' thing - I now seem to be getting around 250,000 pageviews each month.) But I do not really want to start doing a lot of popular journalism. I would much rather journalists used what I wrote as a resource in their own writing.

Paul Krugman, has outstanding visibility as a columnist for the NY Times and has writeen a number of popular books explicating his view and has 1.3 million followers on Twitter; that has not done much good as he is largerly preaching to the choir,of which I am a member.

"The last poll I have seen suggests that 82% of that panel thought the 2009 Obama stimulus had reduced unemployment"

I would agree with the 82% but the question sets a low bar for stimulus. Stimulus seems to be a trade-off; the present benefits, but those benefits come at the expense of the future. So a question which just focuses on the present is missing the point.

" I doubt if anyone would disagree when I say that US economists call the shots as far as academic macroeconomics is concerned"

Obviously my eyes roll here. "Calling the shots?" This is a good justification for - not much.

Are you thinking of question B: "Taking into account all of the ARRA’s economic consequences — including the economic costs of raising taxes to pay for the spending, its effects on future spending, and any other likely future effects — the benefits of the stimulus will end up exceeding its costs."

This is a value-laden question. It depends what your discount function is. Anglo-Saxons have functions which give much more weight to the present than, say, Germans. This does not make the Germans wrong; it just means that Germans have different values. So to give more weight to Anglo-Saxon economists because they "call the shots" is simply a backdoor way of giving precedence to the grasshopper values of the Anglo-Saxon culture.

It is indeed a question of values. That is obfuscated by SWL who tries to give the Impression that economic science only allows of one solution - his, of course (and that of the Anglo-Saxon grasshoppers).

That's a bizarre argument from Peston. Many 'people' arguably even a majority don't think the link between human activity and global warming is a very strong one, would he suggest we give those people equal credence to the vast majority of climate scientists? Oh wait...that's pretty much what the BBC were doing not so long ago....http://www.theguardian.com/environment/2013/oct/09/greg-barker-bbc-climate-change-sceptics

It occurs to me that some Economist bloggers might see one purpose of their blogs as a way to introduce people to the terminology of economics so that they might then go on to have a better understanding of academic papers on the subject. Somehow I can't see the average person doing that.

Perhaps instead Economics bloggers should find a way to write about economics in an approachable way with no jargon terminology at all. While that might be more challenging, it might also be better understood by a wider audience and overall be a better vehicle for their message.

Would be good if a few did that. I've come to a broad view about this by reading articles/blogs by a number of economists like Wren-Lewis, Portes, Krugman, Mazzucato, Stieglitz plus I note pronouncements by the IMF etc. Richard Murphy of Tax Research UK is also worth reading for his views on this and many other topics.

I don't pretend to understand all the details but it seems clear they can't all be wrong in their conclusions. I'm also happy to note they don't necessarily agree 100% about everything, which for me is a sign that they are seriously addressing complex issues.

The media commentators need to get a better understanding of the difference between proper analysis and dogma a la Osborne etc, which is certainly one of the factors that influenced my own views.

The slightly wearying thing with all this is that we'll have to wait for failure to be manifest before the truth or evidence are allowed to interfere with this supposed impartiality. Why do you think that economists are so seldom interviewed on news and current affairs programmes? They don't want hear what you've got to say. It interferes with their narrative.

We all know what is going happen. The ailing British economic Lazarus will be praised as a kind of superman because he's no longer dead. This is the kind of meaningless twaddle sported by the BBC and the government, because the UK, unrestrained by the euro, continues to perform better than economies that have been cut off at the knees. In this relativist twilight world the man with the Zimmer frame is, of course, king. However, it doesn't stop him from being a debilitated buffoon who's inflicted many of the injuries he carries on himself.

After the next round of impoverishment takes place, Osborne, Peston, MSM, assorted city economists will have to explain (again), what is so special about Lazarus and why he always looks so peaky.

At this point some libertarians will recommend Dignitas (Brexit) as the UK and EU persist with this sado-masochistic regime. The script is as tedious as it is tendentious: Britain, the great global trading nation-cum-import-dependent service economy, free from Euro-shackles, will be in a position to resume it rightful place as an industrial giant (the one it chose to divest itself of), trading with all those countries outside the EU it ought to be able to trade with anyway were it to produce anything they wanted to buy.

Peston is not alone, the whole debate in Britain is infused with disinformation, wishful thinking, fantasy and pathetic toadying to vested interests. What's really hilarious is that the opportunity to invest will be delayed until such time as the economy is stunted further and then the great sages will choose to play catch-up when interest rates are altogether less favourable. You couldn't make it up.

SWL, keep up the good work. One day, who knows, the penny drop. My bet is that our great leaders will continue to outsource public sector jobs and compound their present difficulties. They will, of course, claim that they are Lazarus' official guardian courtesy of winning a mandate from 24% of those eligible to vote.

Simon let me be blunt - whilst I get some perverse enjoyment out seeing you and other well-meaning and thoughtful Keynesian liberals like Paul Krugman battle it out with your intransigent right-wing critics, surely you can't be so naive that you don't understand why it is that they persist with their mantra in the face of all opposing evidence?

Paul Krugman's fond of quoting Upton Sinclair "It is difficult to get a man to understand something, when his salary depends upon his not understanding it" but rather than simply dismissing people like, say, Niall Ferguson, as the insincere shills they are, he instead seems to get very personally affronted by their refusal to face objective reality, as if it were a personal insult to his professional integrity!

I think it helps to understand Robert Peston's comments if, purely as a conceptual aid, you translate what he does into Marxist jargon - Robert Peston is a bourgeois lackey who produces pseudo-scientific economics propaganda as part of his paid position within the state's media apparatus. His function is to not to do anything as barbarous as tell outright lies, which would undermine the propaganda's credibility, but to shape the terms and limits of debate whilst maintaining an over-arching ideological narrative that can dominate political discourse in favour of the class which he serves. By controlling the parameters of acceptable opinion, policy preferences that would be harmful to his class can be excluded from consideration, allowing for a very intense level of detailed discussion but only on a very limited range of options and choices, all of which are usually either beneficial or benign to his class.

Most of the public becomes alienated from this performative democracy, see's no real debate taking place over serious issues, and is less inclined to follow news and economics at all, and democracy is hollowed out even further. What little debate does get through ends up as a vague, but often quite virulent, fear of benefits scroungers, immigrants, young people, single mothers and all the other modern witch-hunts which can be used to frigthen people into submission and instill some good old fashioned false class consciousness within the proles.

It's these mechanisms, which are so much better understood if you drop the polite academic tone and preach it like it's a 1970's SWP rally, that make the "media macro" you have accurately analyzed possible, not how reasonable or honest that person is.

Peston's career has been Oxbridge, brief stint in the City, then the FT and a few other papers, all of which were owned by billionaire oligarchs, those members of what Max Hastings correctly decribed as "the rich man's trade union" and who, for my money, have always been the most class conscious people in British society. Someone like Peston not only has a professional obligation to manage to terms of debate, he clearly himself thinks of himself as part of that class, at the very least as a high-profile career appratchik who needs to be in the good books of Murdoch as well as state institutions such as the BBC to preserve his own class position and his own wealth, therefore it's very unlikely Simon that he'll ever bite the hand that feeds.

Outside of yourself and Paul Mason I see absolutely no willingness to try to be critical or brave when it comes to challenging the economic record of the government and it's poweful allies. This is by design, not malpractice. Such is life in a post-democratic Britain utterly captured by the City and their powerful friends in media and government.

New Keynesian theory isn't so clear about the impact of fiscal consolidation at the ZLB as you make it sound. At least for the PIIGS in 2012-... it isn't clear The only formal analysis incorporating sovereign default risk I'm aware of is a paper by Corsetti and co, which was even published as an IMF working paper I think. I think some of their calculations would make fiscal consolidation expansionary for Greece.https://e156e6a2-a-62cb3a1a-s-sites.googlegroups.com/site/giancarlocorsetti/main/ckmm-ej.pdf?attachauth=ANoY7cqy_rQySfAonhtmBV6_PepTACgjJbSKqyLmROPpwq9udcDF4W-gzAVrP2HkhtRN6SjhtolHwT8ByVO31Mf96YjIyIFGDlp6WEIu6PyirIuRCInKeMlwrNzVrJhmSJ3VM8aB_QxO5jYR4FWLpv3e6xY1GO7wm2jTrRYBUd9veLqr3-CilgPceGDjXZ6Ti7QjmgcxONTlRuWaembL14VwqPDBNtPcWgP1vFhGZMnfQrR1xmqIY7U%3D&attredirects=0Furthermore, even without a sovereign default risk channel, New Keynesian theory has multiple equilibria at the ZLB, some of which would reverse standard conclusions of high government spending multipliers. See for example Mertens and Ravn (2014),http://restud.oxfordjournals.org/content/81/4/1637or for a more fundamental critique, there'shttp://faculty.chicagobooth.edu/john.cochrane/research/papers/zero_bound_2.pdf.Of course, one can legitimately say that these are all just theoretical curiosities with little relevance to the real world. But this sort of judgement cannot be defended on purely logical grounds any more. To make it you need to apply your own personal priors about interpreting theoretical model results (which equilibrium to select, how much weight to give rational expectations+unpredictable decision errors versus easily predictable behavioural/rule of thumb equations), SVAR results (do you trust the short term restrictions or the sign restrictions used, do you trust that there's no significant omitted variable/lack of invertibility/small sample bias problems) etc...

Interesting that after you mention "relevance to the real world", you immediately list off a bunch of "priors" NONE of which involves empirical validation ("marking to market" (theory to data)). One theory is precisely as good as any other theory, because "theory"? Not.

I was obviously not talking about cases where default premiums change.

"Of course, one can legitimately say that these are all just theoretical curiosities with little relevance to the real world." That is exactly what I meant by "It may be possible to adapt these models to give you expansionary austerity, but no such adaptations command general or even partial support." If you want to argue against that consensus, you need to argue why the analysis put forward in either of the references you quote is relevant and not a theoretical curiosity. Simply citing the existence of such papers is no evidence at all.

So I'm not really sure what you are trying to say. Are you suggesting there is no consensus, or that the consensus is wrong, or perhaps that theoretical macroeconomists are so ingenious that there can never be a consensus about anything?

I don't know that the consensus is wrong or correct, most times a consensus view wilI be more accurate than than any individual view. I'm saying that a consensus on 1) the New Keynesian model as the core framework for analysis does not imply 2) a consensus on fiscal austerity gdp or employment multipliers, because the theory is indeterminate. To go from 1) to 2), you need to use a less "scientific" judgement factor, the same way that macro forecasts are 50% (or more?) judgement. Maybe this isn't a problem, except if 2) is based on an incomplete understanding of the behaviour of the economy at the ZLB or a financial crisis regime. And our understanding of these extreme regimes is still a matter of active research by an army of professors and young phd students, more than a settled body of knowledge. So maybe the consensus view is less reliable on these matters than for other questions, where the consensus is usually correct.

I think you are wrong when you say "the theory is indeterminate". Nothing in Woodford's analysis, for example, is ambiguous. So you need to argue why one of the (standard) assumptions he was making there is incorrect, and that this can overturn his (pretty simple) logic.

Of course the consensus may change, but I wonder why you are so keen to claim it is unreliable?

Because the conviction of some economists like Krugman, De Long or Summers, who are so convinced of it is so strong (almost arrogant? ) and dismissive of any possible counterarguments that it almost begs for a devil's advocate. I certainly don't have any personal stake in UK political debates: I rarely follow them.

The theory has multiple equilibria under passive monetary policy. In this sense it is indeterminate in that regime. And no, I'm not arguing with the correctness and logic of results by Eggertson and Woodford 's given their assumptions. But I'm not so sure their assumptions are better than those of the alternative equilibria in the Mertens/Ravn paper or in Cochrane's paper for example. But I doubt I can convince you of that or that you can convince me of the opposite in the blogosphere :). It would be better if you wrote a paper on this.

@daniels So now you're arguing from "this time is completely unique and thus not yet understood"? When others (Krugman) have pointed out exactly how it's not unique (Japan) and how well-understood most of it really is. You can always argue that "we've never been here before" simply due to the arrow of time. To do so however is a flat nullification of all human intellect, memory, reason. There is a real reason we're called homo *sapien* you know.

As a non-macro economist who enjoys reading your blog can you please tell me if there is an economic definition austerity? If there is no standard economic definition of austerity then is the standard dictionary definition of adequate when reading about austerity?

Since Robert Peston has called out "Krugman, Wren-Lewis and Portes" by name, surely he is inviting a serious response from them, and others, about why they cannot be simply dismissed with the accusation of having a patronising attitude to the voters. They should explicitly reject his assertion that they are unwilling to take on the arguments made by George Osborne. On the contrary I am sure that they would welcome more chance to debate these issues on the BBC and to explain what they consider to be the flaws in Osborne's policies.

As a journalist for a supposedly politically independent organisation Peston has a duty to report as truthfully and accurately as he can. He has no duty to pretend that the arguments for austerity put forward by George Osborne are supported by mainstream economists. He has to keep his opinions to himself, but he must let the public know what the opinions of the broad community of experts in the field are - and not present their views as if they were the ramblings of a bunch of crackpots.

This article is utter nonsense. Keynesian economics is not taught as an accepted school of thought (at least, by most respected and competent economists), but is instead viewed as one potential explanation.

Your insistence that you are right despite there being no valid or relevant articles published in peer-reviewed journals is absurd. You do not speak for all economists yet claim to do so. It is clear that you lack understanding of the most simple economics, so it is baffling how you can be in a position to teach your baseless views to students.

Expansionary austerity is a straw man. The primary purpose of austerity is to make fiscal ends meet, and there is no doubt that in those terms it works - eg even Greece has a primary surplus (maybe its debt to GDP is worse, but if it is the austerity burden that is lowering Greek GDP, then surely this should bounce back once austerity has done its job).

Also, if austerity is defined as making ends meet, can't it be arranged so that it has less of a depressing impact on GDP, such as tax increases which drag less on GDP, such as on wealth and especially housing occupation?

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